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Life Insurance Compliance Rules

How to survive in a highly regulated industry.

nsurance is among the most highly regulated of
the financial services industries. When coupled with the
professional standards inherent in the practice of public
accounting, compliance issues can quickly become complicated
for CPA firms that maintain insurance practices.

Many CPAs believe they know enough about insurance to
advise their clients. This knowledge—and the overconfidence
it can sometimes bring—puts CPAs and their firms on the
wrong side of some compliance rules. To avoid this problem,
firms must master four main areas of insurance compliance:
services provided, licenses required, disclosure and
recordkeeping.

SERVICES PROVIDED

In the normal course of business, CPA firms provide
clients with strategic, tax and accounting advice related to
general insurance matters. The supplementary marketing
materials describing the firm’s insurance services must be
both appropriate and accurate. For example, in Florida,
agents of a major insurance company sold “retirement plan
investments” to a group of nurses. Because the company
failed to describe these financial instruments as insurance,
the nurses successfully sued.

Although most CPAs are
savvy financial forecasters and spreadsheet creators,
compliance guidelines require an insurance agent to use the
actual illustration provided by an insurance
company when selling a policy. When working with variable
life policies, agents are expressly prohibited from using
any sales documentation not provided by the carrier and
approved in advance by the National Association of
Securities Dealers (NASD).

CPA firms may include
their own abstractions and spreadsheets for insurance
products other than variable life policies. But the client
must also receive the carrier’s
illustration—regardless of how the CPA feels about its
content and presentation. CPA firms should be cautious when
creating and using spreadsheets in their insurance practice
to make sure they don’t use projections that are not backed
up by the actual policy.

LICENSING REQUIREMENTS

The licensing issues CPAs face in the insurance field are
not overly complicated. While specific licensing
requirements vary by state, here are some basic rules:

Whoever presents the insurance product to the
client needs an insurance license.

Whoever receives a commission paid by an
insurance company for the sale of an insurance policy needs
an insurance license.

Whoever offers advice for a fee on an insurance
policy that is unconnected with the purchase of a policy
needs to have a life policy analyst license. Read these
regulations carefully. While there are three exemptions to
this rule, none of them apply to CPAs.

The CPA firm itself needs a license if it
receives insurance sales commissions. Further, the rules
require a firm employee to also have an insurance license. A
good way to meet these requirements is to license an LLC
owned by the partners of the CPA firm to sell insurance. The
licensed individual would work for this entity.

Anyone who sells variable life insurance
policies or variable annuities is required to have an NASD
license, along with an insurance license. NASD licenses are
the series 6 (investment company and variable contracts
representative license) or the series 7 (general securities
representative license) and the series 63 (multistate
license). In addition, the firm needs to affiliate with an
NASD licensed broker–dealer.

There is also a
beginning and continuing professional education requirement
for insurance licenses. For example, California requires 52
hours of prelicense education before qualifying to take the
life insurance exam. During the first four years, licensees
must take at least 25 CPE hours per year. Thereafter, the
CPE requirement is 15 hours annually in a course approved in
advance by the California insurance department.

DISCLOSURE

Client-related compliance requirements focus primarily on
information disclosure. (Liability issues usually stem from
a client’s misunderstanding of life insurance policies and
their changeable nature.) The major written disclosures
compliant firms are required to provide explain:

That the CPA firm has a financial interest in
the transaction and will earn a commission.

The creditworthiness of the insurance carrier
as shown by Standard & Poor’s, Moody’s and A.M. Best.

The legal and tax issues associated with the
proposal, including current and projected interest rates and
mortality tables and the columns showing guarantees by the
insurance company.

The changeability of life insurance policies
and that all numbers are based on the insurance company’s
current assumptions and will change.

Insurance company guarantees including minimum
interest credited to the insured’s account and mortality
charges on the policy (typically based on the 1980
Commissioner’s Ordinary Mortality Table).

RECORDKEEPING

Firms
should keep meticulous records to document that all of the
work on a particular transaction was conducted within
compliance guidelines. It’s best to make all insurance
records either part of the client’s permanent file or easily
accessible in a separate file. The file should contain
records of all discussions for each client meeting
concerning insurance; include who was there, topics
discussed, conclusions reached and recommended actions.

When closing a transaction, CPA firms should create a
comprehensive closing document. It should include details of
the transaction, its intended purpose, compliance documents
and important filing dates. A tickler file that runs the
entire term of the policy can be a reminder of, for example,
things such as discounts if the person suddenly stops
smoking or cancer remission time limits.

The last
part of the closing document should be an appendix
containing signed copies of all related legal
agreements: the policy itself, illustrations, trusts,
collateral assignments, loan and financing documents,
payment schedules, tax due dates and tax opinions.

When tax laws change, a policy may no longer serve its
intended purpose. A good recordkeeping system will enable
CPAs to search databases quickly to find those clients to
whom the new change applies, notify them immediately and
arrange a meeting to consider if any coverage modifications
are needed.

WHAT’S NEXT?

As CPA
firms become more active in offering clients a comprehensive
array of financial services including insurance, the
compliance requirements will increase—particularly in the
area of recordkeeping. This is the nature of public
accounting as a self-regulating industry. CPAs will become
the best-positioned professionals to monitor legal and tax
changes in the insurance industry. The forward-thinking CPA
will monitor industry changes, apply them to individual
client situations and recommend adjustments to client
insurance strategies.

Neil Alexander, CFP, is founder and
president of Alexander Capital Consulting, LLC, in Los
Angeles. His e-mail address is nalex@alexcap.com .

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